Small Business Lending - Blog Posts

Filter by:

Data on the number and amount of bank loans made to businesses are now available on Woodstock’s data portal. These data are important because they provide information about small business access to capital, which is a key element to growth and success. Small businesses create economic opportunity within neighborhoods, increase local employment opportunities, and provide residents a means of wealth building through entrepreneurship. Businesses that have access to adequate levels of capital grow more rapidly, hire more workers, and make more investments than businesses that do not have access. Without the availability of bank loans, small businesses often must turn to alternative forms of capital, which can come with high interest rates, onerous terms, and poor customer service.

This week was the most active week in Springfield so far this year. Friday, April 8 is the deadline for bills to pass out of committee. For Woodstock and our legislative priorities, the week was mostly successful.

As I look at the current landscape in search of barriers to economic security and community prosperity and for opportunities to create effective solutions to those problems, I am excited about the year ahead and about using Woodstock Institute’s applied research, policy analysis, and coalition-building skills to reduce inequality and to increase equitable lending and investments in under served low- and moderate-income (LMI) areas and communities of color, help people and communities build and preserve wealth; and improve access to safe and affordable financial products, services, and systems.

Woodstock will continue to work at local, state, and national levels in 2016 in partnership with existing and new allies. While we will continue to provide extensive regional and Illinois data and technical assistance through our data portal and TA program, we will also use some of the lessons learned from our local data analysis and advocacy efforts to influence developments in other states and at the federal level. Here are some of the highlights of our 2016 policy agenda:

Several years ago, Woodstock joined with other consumer advocates to pass legislation to protect consumers from short-term predatory loans. The Payday Loan Reform Act became law in 2005, and reforms to the Consumer Installment Loan Act became law in 2011. Among other positive changes, those laws placed caps on the amount of interest that lenders can charge. But now, predatory lenders are creeping into the area of lending to small businesses. A report published by Woodstock in August 2014 entitled Discredited: Disparate Access to Credit for Businesses in the Chicago Six County Region reveals that lending by traditional banks is insufficient to meet the demand for small business loans, particularly for businesses in lower-income areas and for businesses in communities of color. Non-bank, “alternative” lenders, which are largely unregulated, are striving to meet this unmet demand. These alternative lenders, which provide high-cost loans with interest rates as high as 200 percent are not even required to disclose the Annual Percentage Rate (APR) on their loans, which makes it difficult for borrowers to know how much their loan costs, which, in turn, makes it difficult to engage in comparison shopping.

2015 was a big year for Woodstock Institute and allies working to expand opportunities for workers to save for retirement and to receive unbiased investment advice. Please take action on two retirement issues described below.

Over the past year, Woodstock has expanded the work it has done to promote greater access to safe and affordable credit for small businesses, building on our 2014 report, Discredited: Disparate Access to Credit for Businesses in the Chicago Six County Region. That report examined lending by large banks to businesses in lower-income neighborhoods and communities of color, specifically small loans that are most likely to go to locally-owned, neighborhood businesses that provide jobs to local residents. The analysis of lending patterns showed that businesses in those neighborhoods were much less likely to have received loans from large banks than businesses in more affluent, predominantly white neighborhoods.

Years ago, as a young married person contemplating starting a family and saving for my children’s college education, I engaged for the first time with a financial planning firm. I learned the hard way the difference between an advisor who earns commissions based on sales of insurance and investment products, and an advisor who works for fees only on a fiduciary basis and does not sell products or earn commissions (such as a fee-only Certified Financial Planner). My initial planner recommended that I invest in a particular 529 college savings plan, without telling me that the recommend plan paid the highest commissions, rather than in a 529 plan with lower costs and better opportunities to grow savings. While I eventually switched my college investments to a lower-cost 529 plan, many people remain stuck in less advantageous college investments because they received advice from advisors who are not acting under a fiduciary standard, which requires that the advisor put the investor’s interests first, not the interests of lining the advisor’s own pockets. Fiduciary standards are needed to protect consumers and help families save more for college.

A growing number of financial products and services are becoming available online. From mortgages to student loans to small business loans, consumers and business owners are able to borrow with a few strokes of the keyboard. While the increased accessibility of products and services may have some benefits for consumers, a number of unregulated financial products may actually do more harm than good. In order to further assess the situation, the United States Department of the Treasury has sent out a request for information about online lending, specifically focusing on small business lending and consumer lending. The data that the Treasury Department receives will help it determine what kind of regulation may be needed to protect borrowers in the online marketplace.

We had a vibrant discussion in Chicago recently on barriers facing women trying to access mortgage and small business credit and ways to support women’s efforts to build wealth. Woodstock Institute and JPMorgan Chase hosted a forum for about one hundred participants from the nonprofit, banking, and government sectors on June 19. Melissa Bean, Midwest Chair for Chase, and I welcomed the group and kicked off the event.

This Women’s History Month, we at Woodstock Institute are reflecting on how women are still at a disadvantage in the areas of income and wealth and what can be done to address that disparity. One of the common ways in which people build assets is by purchasing a home. Woodstock Institute’s research has shown that women are at a distinct disadvantage in obtaining mortgage credit. The Unequal Opportunity report found that applications from women were less likely than applications from men to be originated and that female-headed joint applications were less likely than male-headed joint applications to be approved. We are completing follow-up research which includes a look into whether certain neighborhoods experience more gender disparities in access to mortgage credit than others and suggestions for policy and practice solutions to expand women’s access to mortgage credit.

Woodstock Institute’s most recent report highlights disparities in access to small business loans in the Chicago region. Between 2008 and 2012, businesses in wealthier or predominantly white Census tracts were more likely to receive loans or credit from major financial institutions than businesses in low-income and majority-minority tracts. This creates a substantial business credit gap and allows for little room for businesses in low-income and majority-minority communities to grow. Essentially, marginalized communities become even more marginalized through unbalanced bank lending. However, there is another demographic that also struggles to get the small business loans they need: women.

Washington, DC - Today, the National Community Reinvestment Coalition (NCRC) released a report entitled “Access to Capital and Credit in Appalachia and the Impact of the Financial Crisis and Recession on Commercial Lending and Finance in the Region.”

Richard Otero-Cintrón is the kind of person who knows how to seize an opportunity when he sees one. It’s how he became the owner of North Chicago Auto Service after starting out in 1990 as the maintenance man who swept the floors and made sure the windows were clean. Over the course of fifteen years, Otero-Cintrón earned the trust of the shop’s previous owner through his dedication and loyalty. When the previous owner passed away of pancreatic cancer five years ago, he left Otero-Cintrón ownership of 25 percent of the business and the rest to his widow.

As unemployment continues to remain high, we must look for ways to allow small businesses to expand and create jobs. Small businesses are engines for job creation—they create 80 percent of new jobs—but the recession has taken a toll on small business owners’ ability to access the credit they need to expand their businesses. A number of initiatives have the potential to increase small business lending to sound borrowers.

Microfinance has officially arrived, as evidenced by recent debate about its core purpose. For example, the industry has been portrayed in a New York Times article as seeking to indebt the poor and the vulnerable for personal profit. The recent controversy around microfinance has demonstrated a fundamental misunderstanding of the industry among intelligent commentators. However, the positive outcome is that it has revealed the growing role that microfinance plays in the global economy to bring financial services to underserved populations.

Woodstock Institute and over 300 local and national consumer and community organizations called for immediate Congressional action on a proposal to put Americans back to work and prevent more layoffs and cuts in crucial frontline services. The proposal, the Local Jobs for America Act (H.R. 4812), would provide $100 billion over two years, creating or saving 750,000 jobs providing local services and 250,000 education jobs.

Woodstock Institute staff and members of the Illinois Community Investment Coalition (ICIC) left a big impression at last month’s National Community Reinvestment Coalition Annual Conference. Woodstock President Dory Rand, Senior Vice President Geoff Smith, and Vice President Tom Feltner shared Woodstock’s expertise with community investment advocates from across the country as presenters on panels with topics inlcuding strategies to influence elected officials, foreclosure prevention, and promoting sustainable lending.

Financial reform is at a critical juncture in Washington. The House has already passed a bill to create a strong and independent Consumer Financial Protection Agency (CFPA) to put consumers’ interests over those of Wall Street and crack down on the risky lending that spurred the financial crisis. However, Senate Banking Committee Chairman Chris Dodd (D-CT) continues to compromise the agency’s independence in the interest of bipartisan support.

Momentum continues to build in Washington around expanding small business access to sustainable credit, despite the postponement of the&nbsp;hearing to consider the state of small business lending in local markets in the House Small Business and Financial Services Committees. Keeping credit flowing to small businesses is critical, especially in times of recession and high unemployment. Small businesses are engines for job creation, creating roughly 80 percent of new jobs and employing over half of private sector employees. Ensuring that small businesses are equipped to grow through productive, sustainable credit and create new jobs will be a vital component of economic recovery.

The Consumer Financial Protection Agency (H.R. 3126), the new financial watchdog proposed by the Obama administration and currently being debated in Congress, would have the authority to protect small businesses from risky, unregulated financial products.&nbsp;

The Consumer Financial Protection Agency (H.R. 3126), the new financial watchdog proposed by the Obama administration and currently being debated in Congress, would have the authority to protect small businesses from risky, unregulated financial products.&nbsp;

Popular

This Fact Sheet examines the terms of loans from major online lenders to small businesses. This analysis revealed that non-bank “fintech” loans to small businesses lack transparency regarding costs and terms, have effective interest rates up to over 350%, and include junk fees averaging $795 per loan. These loans, which resemble payday loans and the toxic subprime mortgage loans that led to the Great Recession, are made without regard to small business borrowers’ ability to repay and often trap borrowers in debt.